Sulphur count down

Impact of global sulphur limit on the marine fuels market

The Marine Environment Protection Committee (MEPC) has agreed in principle to make a decision on the global sulphur limit for fuel oil at its next meeting in October 2016. Insight talks to Eddy Van Bouwel, Policy Planning Senior Advisor, ExxonMobil Petroleum & Chemical BVBA, about some of the implications this decision could have on the marine fuels market.

The International Maritime Organization (IMO) is the United Nations’ specialised agency with responsibility for the safety and security of shipping and the prevention of marine pollution by ships. Its Marine Environment Protection Committee (MEPC) considers any matter, within the IMO’s scope, that is concerned with prevention and control of pollution.

Within MARPOL, which is the main international convention covering pollution prevention of the marine environment by ships, Annex VI covers air pollution and emissions. Over time changes have been made to this Annex that have progressively reduced the global emissions of SOx, NOx and particulate matter. In addition, emission control areas (ECAs) have been introduced to reduce emissions of those air pollutants further in designated sea areas.

Under MARPOL Annex VI, the global sulphur limits were cut from 4.5% to 3.5% in 2012 and in ECAs they were reduced from 1.5% to 1.0% in 2010 and then again to 0.1% in January 2015. There is also provision to reduce the current global sulphur cap from 3.5% to 0.5%, effective from 1 January 2020, pending a review on fuel availability. All of these reductions have had significant impacts on the marine fuels market.

Eddy Van Bouwel on the impact of recent sulphur reductions

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The IMO regulation on sulphur in bunker fuels is a key driver for change in the marine fuels market. While the first reduction steps, 1% S in ECAs and 3.5% S globally, have triggered some shifts in how residuals fuels were brought to the market, the 2nd reduction step, 0.10% S in the ECAs and 0.50% S globally inherently lead to a shift towards more distillate type of fuels. In particular the forthcoming reduction of the global S cap from 3.5% today to 0.50% S in 2020 or 2025 will require major adjustments in supply patterns and will lead to a significantly increased demand on refinery conversion processes handling residual streams.

Smooth ECA low sulphur transition

Despite the huge drop in sulphur level, the introduction of 0.10% sulphur fuels in ECAs went fairly smoothly. “Only a limited number of ships installed scrubbers or moved to LNG ahead of January 2015,” Eddy explains. “This meant that the new ECA sulphur requirement essentially led to the full volume of ECA fuel switching over from 1% residual fuel to low sulphur marine gas oil. This additional demand for distillate came on top of an increasing demand in other applications."

“When I look at the historical demand for distillate products over the past 30 years, it has been growing quite consistently at about 25 million tonnes/year.”

Eddy Van Bouwel, ExxonMobil Petroleum & Chemical BVBA

“The ECA demand that came on top of this annual growth in January 2015 was of the same order of magnitude. The refining industry had known that this demand was coming since the Annex VI revision in 2008 and clearly the normal market mechanisms have done their job well,” he confirms.

Fuel requirement study underway

The timing of the proposed global sulphur cap reduction from 3.50% to 0.50% is uncertain. Currently a feasibility study is underway to assess the availability of the required fuel oil and alternative solutions. It is being overseen by a Steering Committee consisting of 13 Member States, one intergovernmental organisation and six international non-governmental organisations.

The study certainly has a lot to consider. Once the 2020 marine fuel demand has been estimated it needs to determine how much fuel may need to be switched from 3.5% to 0.50%. To do this, the number of ships that might install scrubbers or switch to liquid natural gas (LNG) ahead of the potential 2020 deadline needs to be forecast. From a refining perspective, the study will also need an inventory of major projects that are expected to start-up before the end of 2019. In Eddy’s view, conversion units such as cokers and hydrocrackers and hydrodesulphurisation units will be very important to allow the global refining industry to find a new balance between supply and demand in the future low sulphur marine fuels world.

Eddy Van Bouwel on the review of the availability of the required fuel oil

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Marpol Annex VI specified that the global sulphur cap will come down from 3.5% to 0.5% in 2020, but this is subject to a review on the availability of compliant fuel that has to be completed by 2018. On the basis of this review IMO may decide to postpone the implementation to 2025. First of all, the study will need to establish a solid basis to estimate the expected 2020 marine fuel demand, and define realistic mid, low and high cases. To determine how much fuel will need to be switched from 3.5% to 0.50%, the study will need to make a realistic assessment of how many ships can be expected to install srcubbers ahead of the potential 2020 deadline, again including appropriate low and high cases. The same thing will need to happen with respect to LNG. From a refining perspective, the study will need to have a complete inventory of major refinery projects underway that will be ready to start-up before the end of 2019. Conversion units such as cokers and hydrocrackers and hydrodesulphurisation units will be very important to allow the global refining industry to find a new balance between supply and demand in the future low S marine fuels world. To make this assessment, it is absolutely critical that the study recognizes that refining is an integrated business. The ability of the refining industry to continue to satisfy demand from other sectors: road transport, aviation, heating oil and lubricant basetocks, etc. should not be compromised because of the changes in marine fuel demand.

Global sulphur cap timing

At their last meeting, MEPC agreed in principle to take a decision at MEPC 70 in October 2016, on the timing of the global sulphur cap. Based on the outcome of the fuel availability review, which is due to be submitted to that session, the implementation date of the global 0.50% sulphur cap for fuel oil could be confirmed for 2020 or deferred to 2025. This uncertainty has been presenting significant challenges for marine fuel producers, ship owners and operators.

“Refiners are used to making decisions in an uncertain business environment, but the uncertain implementation date of the global sulphur cap could have significant impacts on the viability of refinery expansion or upgrade projects.”

While that is something that each refiner has to deal with on an individual basis, Eddy is pleased that the IMO intends to complete the fuel survey early. “The sooner IMO can provide clarity on the implementation date for the global sulphur cap, the better for all involved in the industry.”

However, it is likely that the introduction of the global cap will be far more challenging than the introduction of 0.1% sulphur fuels in ECAs.

Eddy Van Bouwel on the challenges of meeting the global 0.5% sulphur cap

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Current estimates of the amount of residual fuel that will need to be switched to distillate type of molecules for the 0.50% global S cap are well over 100 million tonnes per year. That is a significantly bigger step than the introduction of the ECA fuel. We are now less than 4 years away from the earliest possible implementation date, and that is a very short period of time when it comes to deciding on and implementing major refinery investments. At this moment, we do not have a firm decision yet on when the rule will come into force. That is the challenge that our industries are facing.

In addition to the uncertainty for the refining industry of the true impact of reducing the global sulphur cap Eddy is also conscious that the environmental benefits must be carefully assessed. “Clearly, lower SO2 emissions from shipping can make a meaningful contribution to air quality improvements in busy ports and in coastal areas with shipping lanes close to shore. However, when emissions occur away from shore, their impact on air quality on land rapidly decreases as SO2 has a relatively short atmospheric lifetime.”

“Removing sulphur from fuels is an energy-intensive process, which unavoidably leads to an increase in the global refining industry’s greenhouse gas emissions.”

Eddy Van Bouwel, ExxonMobil Petroleum & Chemical BVBA

“In my opinion,” he concludes, “there is a balance that needs to be struck when reducing fuel sulphur levels between the air quality improvements that can be achieved and the potential increase in greenhouse gas emissions – and I’m not sure this is quite as straight forward as it may seem.”

Insight will report on the outcomes of the MEPC 70 meeting, being held at the end of October, which will hopefully clarify the timings on the introduction of the global sulphur cap.